2. Compute the new machineâs net present value.
The Sweetwater Candy Company would like to buy a new machinethat would automatically âdipâ chocolates. The dipping operation iscurrently done largely by hand. The machine the company isconsidering costs $190,000. The manufacturer estimates that themachine would be usable for five years but would require thereplacement of several key parts at the end of the third year.These parts would cost $11,100, including installation. After fiveyears, the machine could be sold for $8,000.
The company estimates thatthe cost to operate the machine will be $9,100 per year. Thepresent method of dipping chocolates costs $51,000 per year. Inaddition to reducing costs, the new machine will increaseproduction by 7,000 boxes of chocolates per year. The companyrealizes a contribution margin of $1.55 per box. A 21% rate ofreturn is required on all investments.
1. What are the annual net cash inflows that will be provided bythe new dipping machine?
The Sweetwater Candy Company would like to buy a new machinethat would automatically âdipâ chocolates. The dipping operation iscurrently done largely by hand. The machine the company isconsidering costs $190,000. The manufacturer estimates that themachine would be usable for five years but would require thereplacement of several key parts at the end of the third year.These parts would cost $11,100, including installation. After fiveyears, the machine could be sold for $8,000. | ||
| The company estimates thatthe cost to operate the machine will be $9,100 per year. Thepresent method of dipping chocolates costs $51,000 per year. Inaddition to reducing costs, the new machine will increaseproduction by 7,000 boxes of chocolates per year. The companyrealizes a contribution margin of $1.55 per box. A 21% rate ofreturn is required on all investments.
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Related questions
Problem 13-22 Basic Net Present Value Analysis [LO13-2]
The Sweetwater Candy Company would like to buy a new machinethat would automatically âdipâ chocolates. The dipping operation iscurrently done largely by hand. The machine the company isconsidering costs $150,000. The manufacturer estimates that themachine would be usable for five years but would require thereplacement of several key parts at the end of the third year.These parts would cost $9,600, including installation. After fiveyears, the machine could be sold for $7,000. |
The company estimates thatthe cost to operate the machine will be $7,600 per year. Thepresent method of dipping chocolates costs $36,000 per year. Inaddition to reducing costs, the new machine will increaseproduction by 8,000 boxes of chocolates per year. The companyrealizes a contribution margin of $1.15 per box. A 13% rate ofreturn is required on all investments. |
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables. |
| Required: | |
| 1. | What are the annual net cash inflows that will be provided bythe new dipping machine? |
| 2. | Compute the new machineâs net present value. (Any cashoutflows should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places and intermediate calculations tonearest dollar amount.) |
The Sweetwater Candy Company would like to buy a new machine thatwould automatically "dip" chocolates. The dipping operation iscurrently done largely by hand. The machine the company isconsidering costs $81,000. The manufacturer estimates that themachine would be usable for eight years but would require thereplacement of several key parts at the end of the fifth year.These parts would cost $6,600, including installation. After eightyears, the machine could be sold for $6,100. | ||
| The company estimates that thecost to operate the machine will be $11,500 per year. The presentmethod of dipping chocolates costs $48,000 per year. In addition toreducing costs, the new machine will increase production by 4,000boxes of chocolates per year. The company realizes a contributionmargin of $0.7 per box. A 9% rate of return is required on allinvestments. (Ignore income taxes.) Annual net cash inflows- $39300
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